The shareholders of Core Education & Technologies will not forget 25 February 2013, the Black Monday that brought to life their worst nightmare on the stock market. The rumours that lending institutions had sold the shares pledged to them by the promoters spread like wildfire and the stock tanked 62%, falling precipitously from Rs 295 to Rs 110.50. Two days later, it fell 45% to hit Rs 60. While Core Education & Technologies was, by far, the worst hit, the panic selling that has gripped the market in the past 2-3 weeks has seen several mid- and small-cap stocks drop by 30-50%.

In some cases, the decline was triggered by rumours of pledged shares being sold or corporate governance concerns spilling into the public domain. In other cases, bear cartels and wily operators manipulated the stock prices. This has prompted Sebi to launch a probe into the reasons that led to the mayhem.

The market watchdog suspects that a cabal of barred rogue traders operating through front entities was involved. However, the damage is done. Many investors have lost a huge chunk of their capital. Despite close monitoring by Sebi, the Indian stock market remains a fertile ground for price manipulation. The mid- and smallcap companies frequently witness wild swings in their stock prices. Small investors are usually the ones who suffer the most, even as unscrupulous operators laugh all the way to the exchange.

If price manipulation cannot be checked, should small investors stop buying shares altogether? That would be an extreme solution, but this is precisely what is keeping many potential investors away, believes Vijay Kedia, director of Kedia Securities. "Retail investors are not participating in the Indian capital market because most mid- and smallcap stocks are manipulated and operators are never caught," he says. Are your stocks also being manipulated? Read on to know the telltale signs of stock manipulation and how small investors can guard themselves against such dubious investments.

Problem of pledged shares

The mid-cap carnage in February was triggered by rumours of financial institutions selling the shares pledged by promoters. The latter often pledge a part of their holding as collateral for raising loans. This is a standard industry practice and, per se, not a reason to be alarmed. It's only when the promoter pledges a significantly large chunk of his holding and the overall floating stock of the company is very low that problems can crop up. Brokers often facilitate this funding route for smaller companies, which find it difficult to raise funds through the traditional routes. Even so, most lenders do not offer more than 60-70% of the value of the shares pledged.